The cross-section of stock returns in an early stock market

Using a new dataset which contains monthly data on 1015 stocks traded on the London Stock Exchange between 1825 and 1870, we investigate the cross section of stock returns in this early capital market. Unique features of this market allow us to evaluate the veracity of several popular explanations of asset pricing behavior. Using portfolio analysis and Fama–MacBeth regressions, we find that stock characteristics such as beta, illiquidity, dividend yield, and past-year return performance are all positively correlated with stock returns. However, market capitalization and past-three-year return performance have no significant correlation with stock returns.

Identifying the relative importance of stock characteristics

There is no consensus in the literature as to which stock characteristic best explains returns. In this study, we employ a novel econometric approach better suited than the traditional characteristic sorting method to answer this question for the UK market. We evaluate the relative explanatory power of market, size, momentum, volatility, liquidity and book-to-market factors in a semiparametric characteristic-based factor model which does not require constructing characteristic portfolios. We find that momentum is the most important factor and liquidity is the least important based on their relative contribution to the fit of the model and the proportion of sample months for which factor returns are significant. Overall, this study provides strong evidence to support that the momentum characteristic can best explain stock returns in the UK market. The econometric approach employed in this study is a novel way to assess relevant investment risk in international financial markets outside U.S. Moreover, multinational institutions and investors can use this approach to identify regional factors in order to diversify their portfolios.

The direction of media influence: Real-estate news and the stock market

This paper uses a novel identification strategy to test the influence of news media on the stock market. Because the stock market does not impact the media coverage of the housing market, a relationship between real-estate news and shares of companies engaged in the housing market is attributable media influence. I find that the content of reporting exhibits a significant relationship with stock returns, and the amount of news with the number of trades. These relationships exist even after controlling for known risk factors, housing market performance and intra-week correlation. This finding is consistent with the function of the media as a source of information and sentiment in financial markets.

Long-term return reversals-Value and growth or tax? UK evidence

This paper examines (i) whether value-growth characteristics have more power than past performance in predicting return reversals; and (ii) whether typical rational behaviour such as incentives to delay paying capital gain taxes can better explain long-term reversals than past performance. We find that value-growth characteristics generally provide better explanations for long-term stock returns than past performance. The evidence also shows that winners identified by capital gains dominate past performance winners in predicting reversals in the cross-sectional comparison. However, in the time-series analysis, when returns on capital gain winners are adjusted by the Fama and French (1996) risk factors, the predictive power of capital gain winners disappears. Our results show that capital gain winners are heavily featured as growth stocks. Return reversals in capital gain winners potentially reflect market price corrections for growth stocks. We conclude that investors’ incentives to delay paying capital gain taxes cannot fully rationalise long-term reversals in the UK market. Our results also imply that the long-term return pattern potentially reflects a mixture of investor rational and irrational behaviour.

The character and denomination of shares in the Victorian equity market

The seminal work of J. B. Jefferys highlighted two unusual features of the Victorian equity market, namely high share denomination and uncalled capital. This article examines the extent to which publicly traded company stocks in the nineteenth century had these features. It also analyses the effect of these features on stock returns using monthly data for the London Stock Market over the period 1825–70. We find that stocks with unpaid capital earned a higher return, which is consistent with investors being rewarded for the risk of a call on their personal assets. We also find that stocks with a high share denomination earned a lower return, which is consistent with the view that this feature was conducive to superior corporate governance.

Commonality in Returns, Order Flows, and Liquidity in the Greek Stock Market

Using a unique high-frequency data-set on a comprehensive sample of Greek blue-chip stocks, spanning from September 2003 through March 2006, this note assesses the extent and role of commonality in returns, order flows (OFs), and liquidity. It also formally models aggregate equity returns in terms of aggregate equity OF, in an effort to clarify OF's importance in explaining returns for the Athens Exchange market. Almost a quarter of the daily returns in the FTSE/ATHEX20 index is explained by aggregate own OF. In a second step, using principal components and canonical correlation analyses, we document substantial common movements in returns, OFs, and liquidity, both on a market-wide basis and on an individual security basis. These results emphasize that asset pricing and liquidity cannot be analyzed in isolation from each other.

Rule Britannia!: British Stock Market Returns, 1825-1870

This article presents a new series of monthly equity returns for the British stock market for the period 1825-1870. In addition to calculating capital appreciation and dividend yields, the article also estimates the effect of survivorship bias on returns. Three notable findings emerge from this study. First, stock market returns in the 1825-1870 period are broadly similar for Britain and the United States, although the British market is less risky. Second, real returns in the 1825-1870 period are higher than in subsequent epochs of British history. Third, unlike the modern era, dividends are the most important component of returns.

Do Low-Priced Stocks Drive Long-Term Contrarian Performance on the London Stock Exchange?

We investigate whether low-priced stocks drive long-term contrarian performance on the U.K. market. We find that contrarian performance at low, middle, and high price levels is positive. On the Fama-French risk adjusted basis, we find both low-priced and middle-priced losers have significantly positive returns. When we adjust returns by market and liquidity risk, only middle-priced losers maintain their positive returns. Our results reveal that low-priced stocks are not fully responsible for contrarian performance. Our empirical evidence is generally consistent with the overreaction hypothesis and behavioral models of value investing.

Much Ado About Nothing: The Limitation of Liability and the Market for 19th century Irish Bank Stock

Abstract Limited liability is widely believed to be a prerequisite for the emergence of an active and liquid securities market because the transactions costs associated with trading ownership of unlimited liability firms are viewed as prohibitive. In this article, we examine the trading of shares in an Irish bank, which limited its liability in 1883. Using this bank’s archives, we assemble a time series of trading data, which we test for structural breaks. Our results suggest that the move to limited liability had a negligible impact upon the trading of this bank’s shares.